Emerging markets are growing faster than developed markets, but looking to 2015 and beyond, the growth differential between the two groups of countries is the smallest it has been since the turn of the century. Emerging markets’ contribution to corporate revenue and margin will be neither as stable nor as pervasive as executives in some cases have taken for granted. This reality has major implications for the way that companies consider their global portfolios.
The three most important global economic components driving this shift in emerging markets attractiveness (identified in FSG’s Global Economic Outlook for 2015) are:
- Energy prices, which have fallen quickly and will remain low until at least 2017, increasing the importance of effective portfolio allocation decisions
- The strong US dollar, which changes the economics of local production and competition
- Changing interest rates expectations, which are disrupting local competitors’ cost structures
In a series of blog posts, I will break down what this environment means for multinational corporations’ planning and profitability. As these components tend to reinforce each other over time, FSG sees the global economic environment to be persistent in 2015 and beyond, making it worthwhile to protect your business against consistent macroeconomic adjustments. This week’s post will focus on the instability of emerging markets’ growth and contribution to corporate profitability. Subsequent posts will examine how the competitive environment and customer preferences are shifting as a result of 2015’s global economic environment.
Instability of emerging markets’ growth and profitability
Emerging markets are growing quickly. At a weighted average of 5.0 percent GDP growth in 2015, companies should still be considering emerging markets a major component of their volume and margin growth. However, the economic environment that multinational companies face — in which energy prices have fallen, the US dollar is strong, and interest rate expectations are changing — has disrupted their planning assumptions. Specifically, the uncertain lag between economic shocks and their operational impact is making it difficult for companies to plan for each market segment.
Actions for Multinationals
Unstable growth and profitability need not require a complete planning overhaul. Instead, executives should consider the assumptions on which their portfolio optimization is based and ensure that incremental investment will reach markets where their business can outperform.
FSG is advising executives who find their 2015 plans disrupted to focus on three main activities:
- Rigorously re-prioritize winning markets: Energy price declines have hurt energy-exporting countries immediately, and the benefit for energy-importing countries has transpired much more slowly than anticipated in many cases. This will mean both re-examining the data on which market prioritization decisions are made, and re-considering the assumptions on which those data decisions are founded. Companies that are able to adjust incremental investment plans to capture opportunity in markets exhibiting lower costs and higher consumption growth will outperform in 2015.
- Manage currency and interest rate volatility: A strong dollar and changing interest rate expectations result in depreciated local currencies that can impact MNC earnings and cost structures. Companies may have an opportunity here to extent credit to local partners, or to train partners and customers methods for avoiding currency risk.
- Mitigate the risk of a global crackdown on Western companies: Executives should thus plan for and communicate the risks associated with high-corruption environments. While corruption is not new, a difficult economic environment makes aggressive actions against foreign targets more likely.
Each of these actions contribute to more flexible business plans that allow businesses to protect their bottom line against the instability of emerging markets’ growth and profitability.
This entry is the first in a series of three posts outlining how multinational corporations can course-correct plans and improve profitability where strategic plans have already been disrupted. Stay tuned for Part Two of this series which examines how businesses can prepare for a shifting competitive environment.